BILL ANALYSIS Ó
AB 556
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Date of Hearing: March 22, 2011
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
AB 556 (Wagner) - As Introduced: February 16, 2011
SUBJECT : Punitive damages: restriction of juror rights
KEY ISSUE : Should the traditional right long held by juries to
decide the amount of punitive damages that AN INJURED plaintiff
is entitled be restricted to determining whether the defendant
should have to pay punitive damages, leaving IT TO the judge, a
single individual, to decide on his or her own what the amount
of damages should be?
FISCAL EFFECT : As currently printed this bill is keyed
non-fiscal.
Synopsis
This bill is nearly identical to 2006's AB 1863 which failed
passage in this Committee. Like prior bills similarly sponsored
and supported by some business groups and the Chamber of
Commerce, this bill seeks to limit the traditional right held by
juries to decide the amount of exemplary (i.e. punitive) damages
that a plaintiff is entitled to receive in the rare cases where
exemplary damages are deemed necessary. In relation to
exemplary damages, the bill seeks to limit the role of the jury
to merely deciding whether or not punitive damages are
necessary. In doing so, this bill takes away the jury's
discretion to decide the amount of exemplary damages and places
it in the hands of a single individual, the judge, who on his or
her own will decide what punitive damages should be. Like the
prior bill that did not pass out of this Committee, this bill is
based on an assumption made by some business groups that a trial
judge will be less emotional and sympathetic and more objective
than a jury in deciding the amount of punitive damages that an
injured plaintiff is entitled to.
SUMMARY : Seeks to limit punitive damage awards in California by
having the judge, instead of the jury, decide what punitive
damages will be. Specifically this bill :
1)Provides that in any civil action where exemplary damages are
recoverable for the breach of an obligation not arising from
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contract (i.e. tort) on or after July 1, 2012, the trier of
fact (i.e. the jury) will be limited to deciding whether the
defendant is liable for exemplary (i.e. punitive) damages.
2)Requires that where the jury determines that a defendant is
liable for exemplary damages, the judge shall then decide what
the punitive damages should be.
3)After deciding what punitive damages should be, requires the
judge to enter an order laying out the amount of the award and
laying out the reasons for such an award.
EXISTING LAW :
1)Provides in tort actions, where it is proven by clear and
convincing evidence that a defendant is guilty of fraud,
malice, or oppression, the plaintiff can recover punitive
damages "for the sake of example and by way of punishing the
defendant." (Civil Code Section 3294 (a).)
2)Defines for the purposes of deciding whether punitive damages
apply, the following key terms:
a) "Malice" is conduct intended by the defendant to cause
injury to the plaintiff or "despicable conduct" committed
by the defendant with a "willful and conscious disregard
for the rights and safety of others."
b) "Oppression" is defined as "despicable conduct that
subjects a person to cruel and unjust hardship in conscious
disregard of that person's rights."
c) "Fraud" is defined as "intentional misrepresentation,
deceit, or concealment of a material fact known to the
defendant with the intention on the part of the defendant
of thereby depriving a person of property or legal rights
or otherwise causing injury." (Civil Code Section
3294(c).)
3)Provides that the purpose of punitive damages awards is "not
to compensate the plaintiff but to punish the defendant for
its conduct and to deter similar conduct." ( Century Sur. Co.
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v. Polisso. , (2006) 138 Cal.App.4th 922, 958; Pacific Mut.
Life Ins. Co. v. Haslip (1991), 499 U.S. 1, 19. )
4)Allows a trial court judge to vacate an exemplary damages
award and call for a new trial if he or she believes that a
punitive damages award is excessive and the result of "passion
or prejudice." Also allows a trial court judge to avoid a new
trial if the plaintiff accepts a reduction ("remittitur") of
his or her damages as set by the trial court. (Cal. Civ. Pro.
Code 657; Cal. Civ. Pro. Code 662.5.)
5)Provides that appellate courts shall review a trial court's
award of exemplary or punitive damages under an "abuse of
discretion" standard. ( Boeken v. Phillip Morris , 127 Cal.
App. 4th 164, 1689.)
COMMENTS : Like similar prior bills, this bill continues a
long-standing effort by some business interests to limit what
they contend are unpredictable and excessive punitive damages
awards. To do so, this bill seeks to prevent California juries
from exercising their traditional right to determine the extent
and amount of punitive damage awards in the very rare cases
where punitive (i.e. exemplary) damages are available. The bill
would limit the role of California juries to merely deciding
whether or not punitive damages are necessary. The role of
deciding the level of exemplary or punitive damages would be
placed in the hands of a single person, the judge, to decide on
his or her own what the level of punitive damages should be.
The bill is premised on the assumption that punitive damage
awards are too often awarded out of passion or sympathy by the
jury, and are thus often "arbitrary" and unpredictable for
businesses, injuring the business environment in the state.
Author's Statement : The author contends that arbitrary and
unpredictable punitive damage awards awarded in California have
driven small businesses out of state. Arguing that excessive
punitive damage awards often have no "reasonable nexus to the
conduct being punished", the author seeks to limit what he
thinks are "unreasonable and exorbitant" damage awards in
California.
Background : Punitive damages are awarded to plaintiffs in
California only in cases where a defendant's conduct has been
especially wrongful and egregious. In particular, punitive
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damages are awarded to plaintiffs in cases where a defendant has
acted with "malice," "oppression," or "fraud" and caused injury
to a plaintiff. (Civil Code Section 3924(c).) In general
therefore, punitive damages are awarded in rare cases only where
a jury finds that the defendant has intentionally or recklessly
caused harm to a plaintiff by misleading them or otherwise
committing wrongful acts. In addition to awarding punitive
damages in California, the jury must find that a defendant has
acted in such a way by clear and convincing evidence. (Civil
Code Section 3924(c).)
Punitive damages must also accompany some form of actual damages
that have been awarded (either compensatory or nominal damages).
(see Sole Energy Co. v. Petrominerals Corp .(2005) 128 Cal.
App.4th 212, 238.) In the rare instances where punitive damages
are awarded, they are awarded not to compensate the plaintiff,
but for the purpose of punishing and making an example of the
wrongdoer, in order to deter future wrongdoing. ( Neal v.
Farmers Ins ., (1978) 21 Cal. 3d 910, 928 fn. 13.)
The Constitutional Right to Jury Trials in California Civil
Cases : The Seventh Amendment right to a jury trial in the U.S.
Constitution is not binding on states in civil trials.
Nonetheless, the right to a jury in civil trials in California
is forcefully laid out in Article 1 Section 16 of the California
Constitution, which states: "Trial by jury is an inviolate right
and shall be secured to all?" Reflecting the strength of this
language, throughout California's history this right has "always
been regarded as sacred and has been jealously guarded by the
courts." ( Hung v. Wang (1992) 8 Cal.App 4th 908; quoting People
v. One 1941 Chevrolet Coupe (1951) 37 Cal.2d 283, 286-287.)
Moreover, this "sacred" right has been interpreted as clearly
extending to punitive damage claims in tort cases, the very type
of case that this bill seeks to address. (See Rowe v. Superior
Court (1993), 15 Cal.App.4th 1711, 1718-1719.) In these sorts
of cases, it has long been held that "it is the function of the
jury to determine questions of fact." ( Hung v. Wang , supra at
927.) Thus, this bill's derogation from the traditional role
that juries have played in determining punitive damages would
represent a significant break from California's long tradition
of vesting these types of factual determinations in juries
rather than individual judges, who instead are charged with
determining matters of law. (See Jehl v. Southern Pac. Co.
(1967) 66 Cal.2d 821, 830-831.)
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Substantial Limitations on Punitive Damages Already Exist :
Steps have already been taken to limit punitive damages in
California. In 1987, SB 241 (Lockyer, Ch. 1498 of 1987) raised
the standard of proof necessary to prove that punitive damages
were necessary from a showing of "preponderance of evidence" to
a more stringent "clear and convincing" standard of proof. This
raises the amount of proof that a jury has to find against a
defendant in order to award plaintiff punitive damages. Along
with the higher evidentiary standards required to award punitive
damages, defendants can challenge punitive damage awards they
deem "excessive" by moving for a new trial solely on the issue
of damages. (see Bullock v. Philip Morris USA, Inc .(2008) 159
Cal.App.4th 655, 688.) If the trial court finds that damages
were in fact excessive and the result of "passion or prejudice"
by the jury, a new trial can be ordered. The ability of a trial
court to order a new trial is conditioned by the fact that a
plaintiff can accept a reduced award (remitter) and avoid a new
trial. (Code of Civil Procedure, 662.5; Bullock v. Philip
Morris USA, Inc ., supra, at 688.)
Due Process - Limitations on Punitive Damage Awards : The Due
Process Clause of the Fourteenth Amendment also prevents
excessive or arbitrary punitive damage awards. (see Bullock v.
Philip Morris USA, Inc. , supra at 689-90; State Farm Mut.
Automobile Ins. Co. v. Campbell (2003) 538 U.S. 408, 416-417.)
Thus, if a punitive damage award is grossly disproportionate to
the actual harm suffered, as measured by the compensatory
damages awarded; the due process rights of the defendant are
deemed violated. Thus in the 1995 case, BMW v. Gore , the
Supreme Court reasoned that under due process a person is
entitled to fair notice of potential liability for their
conduct, and that a penalty that bears no reasonable relation to
the conduct violates due process. ( BMW v. Gore (1995), 517 U.S.
559, 562.)
In determining whether a punitive damage award violates due
process, the Supreme Court has laid out three guideposts; "(1)
the degree of reprehensibility of the defendant's misconduct,
(2) the disparity between the actual or potential harm suffered
by the plaintiff and the punitive damages award; and (3) the
difference between the punitive damages awarded by the jury and
the civil penalties authorized or imposed in comparable cases."
( State Farm Mut. Automobile Ins. Co. v. Campbell , supra at 409.)
Importantly, in relation to the second factor, the Court in BMW
v. Gore set a general benchmark "rule of thumb" that in relation
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to particularly serious harm or bad conduct, that a ratio of 10
to 1 between punitive damages and compensatory damages should be
the outer limit. ( BMW v. Gore, supra at 581.) While the ratio
might be lower in cases where conduct and harm was less extreme,
this "rule of thumb" is clearly a strict counterweight to
allegedly grossly disproportionate jury awards.
In a later decision, State Farm Mut. Automobile Insurance Co. v.
Campbell (2005) , the Supreme Court placed further constitutional
limitations on punitive damages against corporate and individual
defendants when it overturned state case law that allowed juries
to use a defendant's wealth as a factor to increase punitive
damage awards. Thus, the Court stated that when applying the
guideposts from Gore , "İt]he wealth of a defendant cannot be
used to justify an otherwise unconstitutional punitive damage
award." ( State Farm Mut. Automobile Ins. Co. v. Campbell , supra
at 427.)
In recent years the Supreme Court has set standards that place
even stronger limitations on punitive damages. For example, in
Phillip Morris USA v. Williams (2007), the Court determined that
a jury cannot consider similar in-state conduct (not involved in
the case) in order to punish the defendant (although they can
still consider similar in-state conduct when determining the
reprehensibility of that conduct). ( Phillip Morris USA v.
Williams (2007) 549 U.S. 346.) This case was soon followed by
the well-publicized case Exxon Shipping Co. v. Exxon Baker
(2008), arising out of the Exxon Valdez oil spill, where the
Supreme Court reduced a $2.5 billion dollar damage award to
$500 million dollars, following a 1:1 ratio of compensatory to
punitive damages based on the specific circumstances of that
case. ( Exxon Shipping Co. v. Exxon Baker (2008) 128 S.Ct.
2605.)
Case Law in California Imposes Limits on Punitive Damages :
California courts have applied similar factors to those laid out
by the U.S. Supreme Court when determining whether punitive
damages are excessive and they have adopted a maximum 9:1 ratio
of punitive to compensatory damages in those cases where the
court finds that the defendant's conduct is characterized by
"extreme reprehensibility" causing physical injury and death.
In less egregious cases, California courts have found that in
"unexceptional" fraud cases resulting in only economic damages,
a 4:1 ratio is an appropriate maximum damage award. (See Bardis
v. Oates (2004) 119 Cal. App. 4th, 1, 24-26.)
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California Courts Already Reduce Punitive Damages Determinations
By Juries : The Boeken case, noted above, decided in 2005, is a
good illustration of California courts' willingness to reduce
punitive damage awards believed to be excessive. In that case,
an initial verdict of $5.4 million in actual damages and $3
billion in punitive damages against Phillip Morris was awarded
to the widow of a man that died from smoking. The jury had come
to this total after finding that the defendant had fraudulently
and intentionally misrepresented the health effects of cigarette
smoking, and that the deceased husband had relied on these false
and misleading advertisements. The trial court reduced the
award through the remitter process described above, to $100
million. Although the plaintiff accepted the reduced amount
rather than face a new trial, the defendant appealed on the
ground that $100 million dollars was still excessive. On
appeal, the 2nd District Court in California reduced the award
still further to $50 million in line with the "rule of thumb"
laid out in BMW v. Gore ( Boeken , supra).
Fifty State Survey of Punitive Damage Award Statutes : In an
informal survey of all fifty states, the counsel for the
Assembly Judiciary Committee found that in the vast majority of
states allowing punitive damages, the jury still retains the
right to decide the amount of punitive damages. In fact, the
survey indicates that Kansas appears to be the one and only
state that currently limits the jury's role to the broad extent
that this bill would. (see Kans. Stat. Ann. 60-3701.)
Empirical Studies State Punitive Damages Are Still Rare : One
need not rely on anecdote when considering the frequency of
punitive damage awards. As one recent study noted:
İP]unitive awards have not increased in frequency over
time; most awards are modest in size and show a reasonable
proportionality between harm and potential harm of conduct;
and there is little evidence supporting the claim that
juries are biased against businesses. (Neil Vidmar & Mirya
Holman, "The Frequency, Predictability, and Proportionality
of Jury Awards of Punitive Damages in State Courts in 2005:
A New Audit, 43 Suffolk U. L. Rev. 855 (2010).)
This general conclusion which is contrary to much of the recent
criticism against punitive damages was embraced by the majority
in the U.S. Supreme Court case Exxon Shipping Co. v. Baker
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discussed above. In that opinion, Justice Souter described
studies as indicating that "discretion to award punitive damages
has not mass-produced runaway awards." Although the amount of
punitive damage awards has grown over time the court said, "the
median ratio of punitive to compensatory awards has remained
less than 1:1". ( Exxon Shipping Co. v. Baker , supra at
497-498.)
ARGUMENTS IN SUPPORT : The California Chamber of Commerce writes
that this measure is necessary because:
Often juries are swayed by passion or sympathy for the
plaintiff, making awards far outside constitutional limits.
Therefore, requiring the courts to make these determination
İsic] from the outset will not only provide more reasonable
awards, but would help streamline court proceedings?
As widely reported in various news outlets, businesses are
relocating or growing their operations outside of
California at an alarming rate. California is ranked as
having one of the worst legal climates in the nation (46
out of 50) in a 2010 Institute for Legal Reform report.
Limits on damages İare] ranked as the second most important
reform issues. We need measures like AB 556 that will help
ensure predictability and consistency in these awards.
The Civil Justice Association of California writes in support
that:
In California, under Civil Code Section 3294, exemplary
damages, otherwise known as punitive damages, are available
when proof by clear and convincing evidence determines
"that the defendant has been guilty of oppression, fraud,
or malice." The Supreme Court has concluded that punitive
damages are similar to criminal punishment and therefore
raise both procedural and substantive federal due process
concerns. In other words, they must be fair. In TXO
Production Corporation v. Alliance Resources Corporation,
509 U.S. 443 (1993), the question was posed as, "whether
that punitive damages award violated the Due Process Clause
of the 14th Amendment, either because its amount is
excessive or because it is the product of an unfair
procedure." 509 US 443, 443, 447.
Additionally, the Supreme Court has reversed awards of
punitive damages for being "grossly excessive" and
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therefore in violation of the Due Process Clause. In BMW of
North America v. Gore, 517 U.S. 559 (1996), the Supreme
Court set forth three guidelines that reviewing courts must
use when determining if an award of punitive damages is
fair.
The Supreme Court favors stringent review of punitive
damage awards, demonstrating a wariness of runaway awards.
In Cooper Industries v. Leatherman Tool Group, 532 U.S.
424, (2001) the Court overturned a punitive damage award
that was 90 times the amount of compensatory damages. The
Court held that appellate courts must review punitive
damage awards de novo - a standard of appeal that
emphasizes the need for heightened review, without
deference to the trial court's ruling.
The Supreme Court has held that punitive damage awards that
are significantly higher than compensatory damage awards
are unconstitutional. In State Farm v. Campbell, 538 U.S.
408 (2003), the Court held that a ratio of 145 times the
amount of compensatory damages was unconstitutional and
ordered the award reduced. The court suggested that
anything over nine times the amount of compensatory damages
would be unconstitutional.
The Supreme Court placed additional limits on punitive
damage awards, holding that a jury may not use punitive
damages to punish a defendant for harm inflicted on anyone
other than the plaintiff in the lawsuit. (Philip Morris USA
v. Williams, 127 S. Ct 1057 (2007)).
California courts have been routinely called upon to
implement U.S. Supreme Court case law in reducing awards
that are found be excessive or unconstitutional (for
example, Simon v. San Paolo U.S. Holding Co., Inc., (2005)
35 Cal.4th 1159; Gober v. Ralphs Grocery Co. (2006) 137
Cal.App.4th 204; Boeken v. Philip Morris Inc. (2005) 127
Cal.App.4th 1640 and I (2004) 119 Cal.App.4th).
ARGUMENTS IN OPPOSITION : Consumer Attorneys of California
oppose this bill, contending it "effectively takes away the
right to a jury trial by mandating that the amount of punitive
damages must be decided by the judge, not the jury. There can be
no legitimate reason for this other than to try to reduce the
amount of punitive damages imposed. Civil punishment should be
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decided, as it always has been, by a jury of one's peers."
The California Teamsters Public Affairs Council opposes the
measure, contending that the bill's approach is "intended to
diminish the punitive damage risks to defendants. There is no
legitimate need for this bill. Civil Code Sec. 3294 sets a very
high bar for pleading and proving punitive damages, and the
courts have imposed significant further limits on the discretion
afforded to juries with regard to punitive damages? The safety
and health of our citizens and their rights under California law
would be jeopardized if corporations had no need to worry about
the possibility of punitive damage awards resulting from
flagrant unlawful activity."
The California Employment Lawyers Association (CELA) also writes
in opposition that:
"İT]here is no evidence that punitive damages awards are
becoming excessive or unreasonable in this state as the author
contends. In fact, the United States Department of Justice's
2005 Civil Justice Survey of State Courts found that punitive
damages were awarded in only 5% of cases with a successful
plaintiff1. Additionally, of the ten largest civil jury verdicts
in 2009, only three included punitive damage awards? This bill
is a solution in search of a problem. Punitive damages serve an
important societal purpose of ensuring that outrageous and
despicable conduct does not go unpunished and any limits placed
on that function will harm workers and society as a whole."
PRIOR RELATED LEGISLATION : AB 1863 (Harman) 2006: Contained
identical language to this bill but failed to pass out of this
Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
California Chamber of Commerce
California Manufacturers and Technology Association
Civil Justice Association of California
Opposition
California Conference Board of Amalgamated Transit Union
California Conference of Machinists
California Official Court Reporters Association
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Consumer Attorneys of California
Engineers and Scientists of California
International Longshore and Warehouse Union
Professional and Technical Engineers, Local 21
Utility Workers Union of America, Local 132
UNITE HERE!
United Food and Commercial Workers - Western States Conference
Analysis Prepared by : Drew Liebert and Travis Brooks / JUD. /
(916) 319-2334